Washington State Hop Producers, Inc. v. Goschie Farms, Inc.
112 Wash. 2d 694, 773 P.2d 70 (1989)
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Rule of Law:
When a supervening event makes a party's principal purpose in entering a contract virtually worthless, and the non-occurrence of that event was a basic assumption of the contract, the party's remaining duties are discharged under the doctrine of supervening frustration.
Facts:
- For 20 years, the United States Department of Agriculture (USDA) required hop producers to possess an allotment called 'hop base' to market their hops, creating a valuable secondary market for this commodity.
- Washington State Hop Producers, Inc., went into court-supervised liquidation, and its Liquidation Trust (Trust) offered two 'pools' of hop base for sale in May 1985.
- Several hop growers (Growers) submitted successful bids to purchase this hop base, with the principal purpose of securing long-term access to the hop market.
- On June 21, 1985, the Trust sent notices of award to the successful bidders, including the Growers.
- On June 27, 1985, after the contracts were formed but before the Trust's performance was due, the USDA announced the termination of the hop marketing order, effective December 31, 1985.
- The USDA's termination of the order rendered the hop base, the subject of the contracts, virtually worthless for any crop year beyond 1985, causing its market value to plummet by over 90%.
- When the Trust attempted to transfer the hop base on July 26, 1985, the Growers did not appear to accept it.
Procedural Posture:
- The Growers filed suit against the Trust in Yakima County Superior Court (trial court) seeking to rescind the contracts.
- The Trust also filed suit against some of the Growers in the same court to enforce the contracts.
- The trial court granted summary judgment in favor of the Growers, ordering rescission on the grounds of supervening frustration, among others.
- The Trust, as appellant, appealed the decision to the Court of Appeals, Division Three (intermediate appellate court).
- The Court of Appeals affirmed the trial court's judgment, finding that the doctrine of supervening frustration supported the rescission.
- The Trust, as petitioner, sought and was granted review by the Supreme Court of Washington (highest court).
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Issue:
Does the supervening termination of a government regulation that created the value of a contract's subject matter substantially frustrate a party's principal purpose in entering the contract, thereby discharging performance?
Opinions:
Majority - Smith, J.
Yes, the supervening termination of the government regulation substantially frustrated the Growers' principal purpose, discharging their duties to perform. This court formally adopts the doctrine of supervening frustration as articulated in the Restatement (Second) of Contracts § 265. The Growers' principal purpose in purchasing, rather than renting, the hop base was to secure future market access, a purpose understood by both parties. This purpose was substantially frustrated when the USDA's termination of the marketing order rendered the hop base irrelevant for future years, which is evidenced by its value dropping over 90%. The continued existence of the marketing order was a basic assumption on which the contract was made. While the termination might have been foreseeable, foreseeability is merely a factor in determining if a risk was assumed; here, the Trust controlled the contract language and did not allocate the risk of termination to the Growers, so the Growers' contractual duties are discharged.
Analysis:
This case formally adopts the Restatement (Second) of Contracts § 265, the doctrine of supervening frustration, into Washington state law. Its primary significance lies in clarifying the role of foreseeability, establishing that it is not an absolute bar to the defense but rather a factor in determining whether the non-occurrence of the event was a basic assumption of the contract. The decision distinguishes between a decline in market value, which is merely evidence of frustration, and the destruction of the contract's underlying purpose, which is the frustration itself. This provides a clear framework for analyzing cases where performance remains possible but an external event has rendered the contract pointless for one of the parties.
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